Archive for 'Problems and Challenges'
Manipulation
Though the creator of a prediction market cannot, absent fraud, guarantee a preferred result, there is a danger that individual traders in a prediction market might be able to manipulate forecasts. One way to do so would be to disseminate false information. To the extent that this approach is successful, it works because it changes […]
Sabotage
If internal or external markets created by corporations become sufficiently important, they might encourage sabotage, in potentially extreme but more likely mundane forms. Suppose, for example, that Google sponsors a market predicting when a new product will be completed. One strategy would be to take the position that the project will be greatly delayed and […]
The Promise and Problems of Deliberation
Although deliberation occurs in a wide range of committees and organizations, it has received the most attention in the political context. Jürgen Habermas, for example, argues that legislation can be legitimate only when citizens assent to it after a deliberative, legally constituted process.2 Some critics have suggested that Habermas places too much emphasis on the […]
Fraudulent Information
Though they might provide incentives for keeping true information secret, prediction markets also might lead to the opposite problem: announcement of false information. Such announcements can amount to more or less sophisticated frauds. A relatively sophisticated fraud might enlist a wide range of conspirators to try to convince the public that some piece of information […]
Market Unrepresentativeness
The primary virtue of normative prediction markets is that they provide a new approach to ensuring that decisions are representative of the preferences of the population at large. In democratic governments, complex systems of checks and balances determine who […]
Private Decision Maker Information
When private decision makers can convey their information to the market, even in summary form, there is no reason to expect that prediction markets should fail to give it adequate weight. Until they convey their views, however, their private information presents another danger: that participants in conditional prediction markets will evaluate possible decisions in part […]
Inefficient Markets
An important argument against increasing reliance on prediction markets in the corporate context is that if prediction markets are inaccurate, then their misleading forecasts might lead to bad decision making. Of course, all proposals to use prediction markets depend at least implicitly on the proposition that the markets are accurate, at least relative to plausible […]
Social Choice Theory
I do not claim that the market-based legislature is an objectively ideal instrument of democracy. Indeed, social choice theory teaches that there can be no ideal, no means of translating personal preferences into collective decisions that will not suffer from some weakness. The most famous result in social choice theory is Arrow’s Theorem, developed by […]
Evolutionary Institutional Change
The institutions of governance evolve extraordinarily slowly. The broad outlines of the current form of government in the United States would be easily recognizable to our nation’s founders, although most specific legislative and administrative programs would be alien. Other institutions, such as corporations and the courts, also have the same structure today that they had […]
The Keynesian Beauty Contest
The dynamics of tacit coordination games are worth exploring in part because some have worried that even ordinary capital markets may be susceptible to similar breakdowns. John Maynard Keynes once compared stock markets to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize […]